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Why Priceline Paid Up Big Time

It cost the company a pretty penny, but Priceline made the right choice to buy OpenTable.

Would you pay $146 for a $100 bill? That's essentially what Priceline(NASDAQ:BKNG) announced. In a move to gobble up dining reservation company OpenTable(UNKNOWN:UNKNOWN), Priceline agreed last Friday to pay $2.6 billion in cash -- a 46% premium to OpenTable's market value at the time.

This move has been met with some criticism, with analysts and investors alike fearing that Priceline overpaid, especially considering that the space is littered with other players. The answer is two-fold. First, OpenTable was a wonderful deal even at the premium price. And second, OpenTable is the best fit for Priceline.

The great dealOf all the suitors out there, it looks like OpenTable gave Priceline the best bang for its buck.

Company

Market Cap

Cash

TTM Revenue

Profit Margin

OpenTable

$1.7 billion*

$118 million

$198 million

11.4%

Yelp

$5.5 billion

$399 million

$263 million

-3%

GrubHub

$2.8 billion

$113 million

$170 million

5.8%

Groupon

$4.3 billion

$1.04 billion

$2.73 billion

-4.7%

Source: Yahoo! Finance

*Market cap at time of buyout bid

For Priceline to acquire a different business it would have had to shell out more cash. Notice that Yelp(NYSE:YELP), Groupon(NASDAQ:GRPN), and GrubHub(NYSE:GRUB) are all valued at above what Priceline paid for OpenTable. Even when considering each company's cash reserves, OpenTable was the most economic option.

OpenTable's business may also be the healthiest of the four -- its profit margin is the highest of the bunch.

And the business is growing. OpenTable works directly with restaurants. The more restaurants that are on board, the bigger OpenTable's potential. Participating restaurants in North America increased 19% year-over-year last quarter, which took the total restaurant count close to 24,000 locations.

So with this purchase Priceline got the most efficient business, with growth like wildfire and a lower valuation than peers.

OpenTable's compatability with PricelineIt gets better for Priceline. Each of these online dining companies has a completely different business model. No two are the same and none aligns better with Priceline than OpenTable.

Everything about Yelp's service is free for users. They can use the service to rate restaurants, post pictures, and discover new places to eat. The site is extremely popular with over 132 million users in the first quarter. Yelp's business model is to generate revenue by displaying relevant ads for its large user base.

GrubHub is also free to use. Its site allows users to order food online. Many large restaurant chains already have websites and apps that allow for ordering, but the majority of restaurants that use GrubHub are small independent restaurants that don't have the means to handle remote ordering. GrubHub's business model is to be the middleman between the small restaurant and the diner, and it collects a small fee from the restaurant in return for this.

Many businesses struggle to reach the masses with advertising. One common way to increase traffic is by running sales or offering coupons, but these methods can also fail to reach the masses. With Groupon's service, businesses can run deals that will hopefully increase their brand awareness and traffic. Groupon's business model is to sell vouchers (coupons) and then collect a previously determined percentage of the total sales.

Each of these peers is growing at a good clip. Last quarter Yelp grew its revenue 66% year-over-year. GrubHub and Groupon grew their revenues 49% and 26%, respectively. Yet none of these businesses could have integrated as easily into Priceline's system. It's not completely an issue of future growth potential, but one of ease of integration.

OpenTable is a dinner reservation website. It's not about placing orders, running ads, or enticing you with special deals. It's about getting you seated at a table in the restaurant. The business model is to collect a fee from the restaurant for handling the booking -- very similar to the way Priceline operates.

The potentialSome may still feel like Priceline overpaid, simply looking at OpenTable's measly $200 million in revenue. But OpenTable's potential is far greater than its current reality.

Very little of OpenTable's revenue currently comes from outside the US -- just about $8 million last quarter. Management talked about more international expansion on its conference call, but Priceline will make sure that happens. Priceline has a growing presence across Europe and Asia and will undoubtedly put OpenTable on the fast track to international recognition.

Not to mention the fact that integration with Priceline will drive OpenTable's existing market sales. We don't know how many transactions it processes, but consider that Priceline did $12.3 billion in sales in the first quarter, compared to OpenTable's $54 million. Without a doubt Priceline has thousands of users who have never used OpenTable's platform. As the two integrate, I fully expect OpenTable's bookings to receive a gigantic boost.

Final thoughtsPriceline wants to do everything possible to remain the international leader in online travel reservations. Paying up for OpenTable is yet another smart move which looks to keep Priceline a step ahead of competitors Expedia and Orbitz into the future.

Author

I've been a contributor with the Motley Fool since 2012. My love of good food keeps me mostly analyzing the restaurant sector. But I'll jump into any sector when I see a shining value opportunity. Follow @Quastman